Why Did Merck Spend $4 Billion on a Tiny Biotech Firm?

Source: Thinkstock

Source: Thinkstock

Merck & Co. Inc. (NYSE:MRK) has had its sights set on conquering the hepatitis C market for a long time now, and the recovering drugmaker is hoping that a small Cambridge, Massachusetts-based biotech company, Idenix Pharmaceuticals, Inc. (NASDAQ:IDIX), can help it move forward in the race to develop a serious competitor to Gilead Sciences’ (NASDAQ:GILD) blockbuster treatment, Sovaldi.

It won’t be easy to produce a contender to Sovaldi, however. The drug, which is the first of its kind, boasts a 94 percent cure rate and is expected to generate between $7 and $12 billion in 2014. The drug swept onto the stage early last year and in its first-quarter alone tallied $2.27 billion in sales, setting a new record as the fastest (and one of the most profitable) drug launches ever.

Merck and Idenix came to an official arrangement Friday, The Wall Street Journal reported; Merck paid $3.85 billion for Idenix, three times the company’s worth, in the hopes that the small biotech can help Merck expand its hepatitis C portfolio. “The goal here is to cure everyone,” said Merck’s Roger Perlmutter, chief of the company’s research and development unit.

Investors might be wondering just what does Idenix have going for it that Merck would shell out nearly $4 billion for a non-existent drug that no one can guarantee will work, or will work as well as Sovaldi? If Merck’s hepatitis C cure fails in clinical trials, or is unable to capture enough of the market share, what then? After all, Idenix currently has no products on the market, a staff of just 85 and posted less than $1 billion in revenue last year — what’s all the hullabaloo about?

Source: http://www.flickr.com/photos/epsos/

Source: http://www.flickr.com/photos/epsos/

First, let’s dive into some recent history: the market for hepatitis C treatments is very, very new. Prior to Sovaldi’s release, several companies, in addition to Gilead – including Merck, AbbVie Inc. (NYSE:ABBV), and Bristol-Myers Squibb Co. (NYSE:BMY) — had all hoped to be first on the scene, and ever since Sovaldi broke records with its blockbuster debut, those same competitors have been itching to disrupt Sovaldi’s monopoly, effectively rendering the market for hepatitis C treatments a two-horse race.

So far, none of those competitors have had much success, though Merck has come closest to meeting Sovaldi’s impressive results. In fact, as stated previously, Merck’s investigational drug is actually more effective than Sovaldi, with an 98 percent success rate. The catch? It requires a much longer coarse of treatment, and has not yet made it through late-stage trials. That said, most experts concede that Merck remains solidly in the lead to be Sovaldi’s biggest competition, despite the fact that other competitors remain eager to grab their own shares of the market.

Perhaps the most salient issue regarding Merck’s acquisition is this: we won’t know whether or not Idenix was worth the small fortune that Merck paid for it until we know if the drug that eventually results from the agreement works. This seems to be most analysts’ conclusion — if it works, great, then Merck has successfully made a place for itself in the hepatitis C market … but if it doesn’t work?

Late stage trials, though — “late-stage” often have their hiccups. It wouldn’t be the first time that a promising drug was scraped in its final stages of development. The bottom line is if Idenix and Merck can’t work out a successful competitor to Gilead’s Sovaldi, then the acquisition was an unnecessary risk, likely leaving Merck back where it started — desperate to rejuvenate its revenue growth. The pressure’s on.

Source: http://www.flickr.com/photos/amadika/

Source: http://www.flickr.com/photos/amadika/

What Merck has going for it

Merk is already close to achieving success with one of its own hepatitis C treatments. According to a recent report from Forbes, Merck’s MK-5172 and MK-8742 have shown high cure rates in patients with genotype 1 of the disease. What the company is missing, however, are drugs that would allow for the development of a combination therapy that would deliver successful results in patients with virtually all types of the disease. A combination therapy would also shorten treatment time down to as little as four to six weeks.

Idenix is similarly invested in hepatitis C. Idenix currently has three different investigational drugs developed for the treatment of hepatitis C in their pipeline. Arguably, there’s no better company to invest in if hepatitis C is a market you’re looking to delve into, and further, Idenix seems to have exactly what Merck needs.

There is one Idenix drug in particular that Merck is interested in. Currently referred to simply as IDX 21437, the drug has shown effectiveness against all genotypes of hepatitis C in early stage trials. Merck is betting this drug, which works by inhibiting a protein that the hepatitis C needs to replicate, is the key to a successful contender to Sovaldi. If Merck is successful in adding IDX 21437 to its current combination therapy, it’s possible that the drugmaker could come up with a therapy with a severely shorten treatment time, which, at the same time, would effectively treat most patients.

Andrea Branch of the Icahn School of Medicine at Mount Sinai in New York says the Idenix drug is crucial to reducing treatment time because of its function as a nucleotide inhibitor. “The faster you can shut it down, the less opportunity the virus has to replicate in the presence of the drug, the greater the likelihood of successful treatment,” she told Forbes in a recent report.

Source: Thinkstock

Source: Thinkstock

Experts seem to think that the market is large enough to handle two competitors. Three million Americans currently live with hepatitis C, and worldwide that number jumps to include more than 150 million individuals. Forbes predicts that the market for hepatitis C cures could jump to around $20 billion by 2020, and most analysts concede that unless there are viable competitors available, Gilead is likely to snatch up as much as 80 percent of that market.

Sovaldi has managed to garner itself a bad rap in the healthcare industry. It’s possible physicians and insurers alike will be eager to prescribe patients an alternative, especially if Merck is able to provide a cheaper treatment option. Sovaldi’s cost even helped catalyze a lobbyist war in Washington earlier this month, with American Health Insurance Plans criticizing the rising cost of drug prices. Physicians have echoed the sentiment that Sovaldi’s price is simply too high, particularly given the demographic most likely to be infected by hepatitis C.

If Merck’s combination therapy succeeds, it could be even better than Sovaldi. Roger Perlmutter, Merck’s chief of research and development told The New York Times on Monday that, “My belief is is that a three-drug regimen will work even faster. We are betting, I’m betting, that through this transaction we will be able to demonstrate superiority to any other regimen.” Merck’s medicine would constitute a three-drug combination therapy that would be able to treat most forms of the disease, and would take less time to do so than the currently available therapies on the market, assuming that the drugmakers’ other competitors don’t beat Merck to it.

Source: http://www.flickr.com/photos/deathtiny42/

Source: http://www.flickr.com/photos/deathtiny42/

Where Merck might fail

Merck’s drug needs time. Sovaldi is curing people now. In contrast, Idenix’s IDX 21437 is currently in early stage trials, while Merck’s most promising treatments, MK-5172 and MK-8742 linger in phase III studies. It’s estimated that it could take as long as five years for Merck’s combination therapy to be approved by the FDA, meaning that Sovaldi has an impressive head start, and plenty of time to make a killing for Gilead Sciences’ as the lone wolf on the market.

There’s no guarantee Merck’s drug will make it past late-stage trials. Were Merck’s investment to fail, the struggling drugmaker could be, essentially, back where it started in its efforts to regain its R&D momentum. Forbes notes, however, that the company also has a number of promising cancer drugs in its pipeline, such as MK-3475, otherwise known as lambrolizumab, an immuno-oncology medicine that helps the body’s immune system detect cancer cells, which are normally difficult to identify. If Merck’s hepatitis C bet doesn’t pan out, the company may be overly reliant on its oncology pipeline to salvage its revenue growth.

Merck needs to be prepared to offer its drug at a lower price than Sovaldi.Sovaldi already has the benefit of being first to market, so any competing drugs that are released, in order to be profitable, will need to compete with Sovaldi on price. Merck won’t have the same luxury that Gilead had in pricing debut treatment.

Competitors’ own drugs are likely to dilute the market.As we’ve mentioned previously, Merck isn’t the only one hoping for the opportunity to compete with Sovaldi and snatch up some of the $20 billion market. AbbVie and Bristol-Myers are probably Merck’s two biggest competitors here, though neither company seems to have a therapy as effective as Merck’s current line-up has proven in clinical trials.

Source: Thinkstock

Source: Thinkstock

Overall, it seems that Merck is making a wise choice with its decision to purchase Idenix; the little biotech that could will provide Merck with a number of important resources at a very crucial juncture, though investors won’t know for sure until the drug sees late-stage trials and, more importantly, FDA approval. Merck’s definitely taking a calculated risk with this move, and though most analysts seem to support the merger, it’s important to note that the acquisitions affect on share price is likely to be short-lived. Don’t count your chickens, and all that.

We would like to see Merck pursue other lines of research now that the company is beginning to pick up momentum. Orphan drugs, in particular seem like a more profitable route for a company still getting back on its feat after years of less-than-stellar R&D. A recent report from Genetic Engineering and Biotechnology News notes that the FDA provides a 50 percent tax credit for rare disease treatments in addition to less expensive clinical trials. Between these two factors alone, the report says, companies can save more than $350 million in clinical trial costs. Merck, once an R&D titan, deserves its a blockbuster of its own, rather than playing second fiddle to Gilead’s virtuoso.

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